Appeasing everyone satisfying no one AICD Review

Friday, 01 July 2005


    Managing shareholder activism "requires directors to recognise the company stakeholders, communicate with them effectively and communicate with the company as a whole", says Michael Parshall, a partner at law firm, Clayton Utz.

    Appeasing everyone - satisfying no one?

    Ali Cromie

    Managing shareholder activism "requires directors to recognise the company stakeholders, communicate with them effectively and communicate with the company as a whole", says Michael Parshall, a partner at law firm, Clayton Utz.

    While there is no "one size fits all" approach to managing shareholder activism, Parshall identifies three common themes influencing shareholder-director-corporation relations:

    • The changing legal environment
    • Key shareholder groups and key interests
    • Communications tools to manage shareholder issues

    Parshall was a keynote speaker at the AICD Sydney Directors' Briefing "Managing Shareholder Activism" in May.

    The changing legal environment

    The balance of power between shareholder and board has swung towards shareholders. Reasons include increased shareholder awareness of their rights, changes in corporation law, court judgments and litigation funders bankrolling class actions against directors and companies.

    Courts see themselves as "the protector" of the investing public's interests, contends Parshall, citing the decision in the Greaves case (ASIC v Rich [2003] NSWSC 85). Justice Austin observed in the Greaves matter that it was the court's role "to articulate and apply a standard of care that reflects contemporary community expectations". (Justice Austin found that a company chairman had responsibilities beyond those of his fellow non-executive directors.)

    Parshall says expansion of social concern may also have led to an increase in class actions. "The plaintiff bar is certainly looking for matters," he say. Class actions such as AMP/GIO are part of a "growing trend". (GIO shareholders accepted $112 million arising from misleading statements made during the $3 billion takeover by AMP for GIO in Australia's largest ever class action settlement two years ago).

    More recent class actions include shareholders claiming $75 million damages against West Australian mining company, Sons of Gwalia (in liquidation) and company directors, alleging misinformation about the hedging position of the mining company. Litigation funder, IMF (Australia) is backing the plaintiff shareholders.

    In another action shareholders are seeking $35 million from technology developer Media World Communications (in liquidation) and company directors relating to alleged misleading information in the software company's prospectus (see "Class Actions on the Rise". Law Reporter, May).

    Amid unremitting changes in corporate law, Parshall says three immutable elements remain:

    • the principle in companies' constitutions providing that the business of a company is managed by or under the direction of directors
    • that shareholders have the benefit of limited liability
    • that directors owe duties to the company and its members as a whole, not to a specific shareholder or class of shareholder

    Key shareholder interests

    An important - but non-legal - change in the corporate environment has been the rise of the active institutional investor, says Parshall

    Institutions are forming their own views about shareholder value and seeking to influence companies by speaking publicly about their voting intentions.

    Examples include institutional investors pressuring media tycoon Rupert Murdoch to withdraw proposed options for News Corp executive directors on the eve of its 2003 annual general meeting in Adelaide, and, Colonial First State ousting Lend Lease as asset manager of the Lend Lease US Office Trust at an extraordinary meeting of unit holders in Sydney in late 2003.

    Boards can no longer rely on the institutions to follow their recommendations, says Parshall. A "compelling business case" is required.

    In the face of vigilant shareholders, corporates and fund managers are hiring external advisers to consult on governance best practice. Sandy Easterbrook, co-principal of external adviser Corporate Governance International joined Parshall from Clayton Utz on the rostrum along with AICD CEO Ralph Evans to discuss shareholder activism.

    Easterbrook believes shareholders are "remarkably responsible", citing the small number of shareholder groups who requisition meetings. If a company keeps getting into getting into trouble with its shareholders, "then something needs to be done about the board," says Easterbrook.

    Communications tools to manage shareholder issues

    The internet, video link-ups, webcasting and electronic proxy submission are communications tools, changing the way companies interact with shareholders. The annual general meeting is arguably in its twilight.

    "In some respects one could argue that the whole issue of the AGM is up for debate," says Parshall

    echoing the view of ASIC chairman Jeff Lucy, who is reportedly keen to reform the way companies conduct annual meetings.

    To create long term value, says Parshall, there needs to be an "appropriate and constructive balance and dialogue between the shareholders and the board". He acknowledges that there remain some "fetters" on director ability to meet shareholder expectations for better information. This includes the "fundamental principle" that material information can not be disclosed to any institutional investor that has not or can not be contemporaneously disclosed to the entire market.

    * Ali Cromie is a learning facilitator for AICD education programs and principal of Rigour Group, specialising in employment screening of senior people to reduce organisation risk.

    Elevating corporation-shareholder rapport

    AICD CEO Ralph Evans has unveiled a three-point plan to enrich the relationship between directors, shareholders and corporations.

    Shareholders, as the owners of companies, have a right to take an active interest in their companies, says Evans.

    The AICD would like to see "more informed and intelligent engagement" between companies and shareholders, he told directors at its recent briefing on shareholder activism.

    The three measures that the AICD suggests to enhance corporation-shareholder relations are:

    • Liberal intelligent reading and application of the Australian Stock Exchange (ASX) Principles of Good Corporate Governance and Best Practice, especially under the "if not, why not?" approach to disclosure of corporate governance practices

    The rationale is to discourage companies "ticking boxes" to meet ASX guidelines when the company's approach to corporate governance differs for sound reasons

    • Extension of "legal safe harbour provisions" in the Corporations Act to protect diligent directors who release information in good faith to the market that turns out to be wrong

    The rationale is to facilitate more informed analysis of companies, thwarting situations where a company says, "we can't issue a forecast, but you might well look at the analysis by X (nudge nudge)"

    • Improved communications with retail shareholders

    The rationale, to encourage greater use of the internet for mass disclosure of information, e.g. as the primary source for a company's annual report. (The AICD is developing a blueprint for a slim "shareholder-friendly" printed annual report)

    Evans says while Australia has a "strong shareholder economy", the AICD wants to contribute to its further development. Part of this will be "more informed and intelligent involvement" by shareholders.

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